Latency Wars - The Empire Strikes Back - 5 February 2010

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Few can have missed the announcement this week that the LSE's new low
latency platform, Millennium Exchange, will be up and running in
September. This comes just months after its acquisition of the
Sri Lankan firm, Millennium IT, which supplies the technology and
is testimony to the new thinking now taking place at the LSE. The
same news item also mentions that the LSE has adopted a "self
certification procedure" for the transition which will place the
onus on the trading community to ready itself for the new
platform. This is a canny move by the LSE as it enables them to
regain the initiative and, at the same time, set the agenda for
its members and technology partners. This is because both will
need to focus on ensuring an orderly transition to the new
platform between now and the go-live date.

Jeremy Grant's article on FT Trading Room earlier this week highlights
what all the fuss is about: latency and the growing number of
High Frequency Traders who supply more and more of the liquidity
in today's markets. Whilst we can all debate whether the HFT
phenomenon is a good or a bad thing, they are most definitely
here to stay and have been a fundamental force in fragmenting
liquidity both in the US and in Europe. Now that Tokyo has joined
the low latency debate with the TSE's new arrowhead platform it
will be interesting to see if this ignites the fragmentation fuse
in Asia too.

This headlong rush to low latency must of course be accompanied
by due consideration for resilience and failover. Most
technologists agree that there is a basic trade-off between speed
and resilience - the faster you go the harder it is to put the
car back on the track if something goes wrong. In the US, this is
much less of an issue as the rest of the market provides
resilience in the event of a glitch at any one venue. As we have
seen in Europe, however, the lack of a consolidated tape and
other factors mean that trading seems to simply stop in the event
of an outage at a primary exchange.

On this point, it was interesting to see the results of our own
poll on how best to solve the current issues surrounding the lack
of a European consolidated tape. 60% favoured a collaborative
approach as opposed to more regulation. With the stakes so high,
and so many vested interests, it will be a great achievement if
we can solve these issues ourselves without more "help" from the
regulators.